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Puerto Rico Supreme Court halts pension reform, angering governor

Alejandro Garcia Padilla makes his inaugural speech as the 10th Governor of the Commonwealth of Puerto Rico in San Juan, January 2, 2013. RE
Alejandro Garcia Padilla makes his inaugural speech as the 10th Governor of the Commonwealth of Puerto Rico in San Juan, January 2, 2013. RE

SAN JUAN (Reuters) - In what Governor Alejandro Garcia Padilla called a "dangerous decision," the Puerto Rico Supreme Court late Tuesday halted implementation of a teachers pension system reform as it agreed to hear a lawsuit seeking to have the reform overturned as unconstitutional.

The reform, enacted December 24, is one of a series of steps the Puerto Rico government has taken in a bid to retain its investment-grade credit rating, which stands just a single notch above junk-bond status by all three Wall Street credit rating agencies. In halting the reform, the Supreme Court said the plaintiffs could suffer material harm from its implementation.

The court appointed a special commissioner to collect evidence, hold a hearing and submit a report on its findings by February 7.

"The resolution emitted by the Supreme Court is particularly dangerous in this historic moment in which we live because our will to save the teachers pension system is being evaluated in relation to the country's credit rating," the governor said in a prepared statement.

"The times call for intellectual generosity and historic responsibility from the judicial branch," he added.

The ruling was handed down in the midst of a two-day strike that kept public school classrooms empty to protest the pension system changes.

The lawsuit, filed by the Teachers Association and a number of other plaintiffs, argues that due process was not followed and says the commonwealth government could have taken less onerous measures to shore up the pension system.

The Teachers Pension Fund has a deficit of $10 billion and is slated to run out of cash by 2020 without the reform, officials have said. There are 41,973 participants and 37,996 retired beneficiaries, with the fund receiving just 17 cents for each $1 it needs each year to pay for benefits and operations.

The reform honors existing accumulated defined benefits but closes down the system for all, switching over to a defined contribution plan.

The reform increases employee contributions to 10 percent from 9 percent and pushes up the retirement age, currently as low as 50, to 62 for new employees, and to 55 or 60 for existing employees, depending on years of service. The reform enacted a minimum $1,625 monthly pension, which is above the current average monthly benefit of $1,371.

Meanwhile, the government's contribution increases between 1 percent and 1.5 percent annually for the next several years, pushing up its current 9.5 percent contribution to 20.52 percent in 2022.

The government is planning a return to the municipal bond market by the end of February, as part of efforts to retain its investment grade rating. Officials say the exact timing and size of the deal are still pending. They have said in the past that they would try to raise between $500 million and $1.2 billion through bonds backed by the sales and use tax and sold through the Sales Tax Financing Corporation, known as Cofina.

Both Moody's Investors Service and Fitch Ratings, which have warned of a potential downgrade of Puerto Rico general obligation and related credit to junk, have cited market access, as well as budget and economic performance as critical factors in retaining an investment grade rating.

The Puerto Rico legislature is also considering several measures aimed at bolstering the government's fiscal position, including a bill that would order government entities to transfer about $2.8 billion in deposit with island banks to the Government Development Bank.

The Supreme Court will also hold a hearing on a lawsuit challenging the constitutionality of a separate reform of Puerto Rico's pension fund for the judicial branch filed by the Puerto Rican Judiciary Association. The suit argues that the legislature overstepped its bounds in enacting the reform, which increased the judges' contribution to the pension plan to 10 percent from 8 percent and lowered pensions to 60 percent of salary from 75 percent.

(Reporting by Reuters in San Juan; Editing by David Adams and Leslie Adler)

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